2019 Economic Outlook: Are We Headed Toward a Recession?

As we head into 2019, some economists are starting to speculate that the long-running U.S. economic expansion might be nearing an end — and a recession could be looming sooner rather than later.

The U.S. economy has been growing steadily since the summer of 2009, making it the second-longest expansion on record. If growth continues past this June, it will set the record for the longest expansion since the Great Depression.

Defining a Recession

As talk of a possible recession heats up, it’s worth answering the question: What exactly is a recession?

Simply put, a recession is when the economy stops growing and starts contracting instead. One common definition of a recession is two consecutive quarters in which the Gross Domestic Product (GDP), which is the total value of goods and services produced in the country, shrinks.

The National Bureau of Economic Research, which tracks economic activity and officially marks the beginning and end of expansions and recessions, takes a broader view that also considers four other economic indicators: income, employment, manufacturing and retail sales. These indicators are released monthly, so a recession can technically begin before quarterly GDP numbers are released.

Recessions vary widely in their length and severity — from long and painful to relatively short and painless. The most recent recession of 2008-2009, which is often referred to as the Great Recession, was an especially long and destructive one. Lasting for 18 months, it was exacerbated by the stock market crash that occurred in September of 2008. This didn’t cause the Great Recession, which was already underway, but most experts say it made it much worse.

Of course, we have seen the stock market fall drastically over the past few months. But it’s important to realize that stock prices don’t directly affect economic growth or cause recessions. The other economic factors cited above are better indicators of recession or expansion.

Reasons for Recession Talk

So if the falling stock market isn’t an indicator of recession, and the unemployment rate is still at its lowest level in decades, why do some experts believe that a recession is imminent? There are several reasons.

One is the length of the current expansion. Some simply believe that the economy is long-overdue for a recession. But others say that expansions don’t die of “old age” — theoretically, they can go on indefinitely. It takes some kind of shock to the economic system to knock the economy off its growth track and into recession, this thinking goes.

Another is the fact that in early December, the U.S. yield curve became inverted for the first time in a decade. An inverted yield curve — in which the yield on short-term Treasury notes exceeds the yield on long-term Treasury notes — has historically been a reliable predictor of recession because it’s a sign that investors expect economic growth to weaken in the future.

Every recession that has occurred over the past 60 years was preceded by an inverted yield curve, according to researchers at the Federal Reserve Bank of San Francisco. Also, there was only one instance during this time when an inverted yield curve wasn’t followed by a recession.

However, this doesn’t mean that a recession is right around the corner. Some economists believe that in this instance, the inverted yield curve occurred due to the influence of moves made by the Federal Reserve, rather than the free market. If this is true, the long-term yield curve may have become a less-reliable indicator of recession than it used to be.

Positive Economic Signs

A look at several other key economic indicators seems to reveal that the economy remains on solid footing. For example, consumer confidence is still high as household and disposable incomes rise along with wage growth and tax cuts, and gas prices remain low in many areas of the country. Consumers tend to be accurate forecasters of recession, since about 70 percent of economic activity is driven by consumer spending.

As for recession warning signs, it’s worth paying especially close attention to the brewing trade war between the U.S. and China and whether the two nations can reach some sort of trade agreement. Rising household debt levels — now at a record $13.5 trillion — could also be an area of concern.

Please contact us if you have more questions about economic cycles and how they could affect your financial and investing strategies.

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